Getting
Azerbaijan's Oil to the International MarketThe Turkish
Perspective

by Necdet Pamir

How will landlocked
Azerbaijan get its crude oil to the international market? Through
Russia? Through Georgia? Armenia? Iran? or Turkey? The decision
will be one of the critical decisions that effects economics
and politics, not only for Azerbaijan, but for the entire region
in the coming decades.

Determining the route for what has been termed "major oil"
which will come from the prolific reserves the Azeri-Chirag-Guneshli
fields must be made in 1996 to be on track with the Consortium
Contract which went into effect in December 1994. In the meantime,
to expedite the production of "major oil", consideration
is currently underway to explore a route/routes for export of
what is termed, "early oil" which could begin flowing
by next year from the deep water fields of Guneshli.

According to the contract, "early oil" regardless of
how profitable, is an optional decision in terms of fulfilling
the Consortium Contract. However, all parties are hopeful that
successful transport can be found. A decision by AIOC and SOCAR
(State Oil Company of Azerbaijan) is scheduled for mid-October
1995.

Here is a Turkish perspective on the issue.

Diversification is always the wisest energy policy. This is true
regardless of whether you are the buyer or seller. Obviously,
Azerbaijan's leadership is thoroughly exploring these various
options and may well arrive at a decision to use more than one
route. Given the geographic, economic, and political complexities,
each option clearly offers advantages as well as disadvantages.
However, if each country neighboring Azerbaijan could become
involved, such an arrangement would, no doubt, help establish
more stability in the region.

The Pan-Caspian region (including Iran and Kazakhstan) is expected
to become a global oil province in the next decade. Some equate
Azerbaijan's reserves alone to that found in the North Sea. Some
compare it to Kuwait. In addition to the Azeri-Chirag-Guneshli
(Deep Water) fields for which a contract has already been signed
with 10 foreign oil companies, Azerbaijan has other fields of
substantial reserves, both offshore and onshore, such as Shakh
Deniz, Karabakh, Muradkhanli, Surakhany Sands, and various others.
If Kazakhstan oil is combined with Azerbaijan's oil with the
current projects, an estimated 100 million tons of additional
oil per annum (one ton is seven barrels) needs to considered
into the equation for finding transportation to the international
market.

Turkey is proposing that one of those options explore the possibility
of a pipeline through her territory. We are pushing hard for
a pipeline to be constructed, which would entirely bypass the
Bosphorus and divert oil to the port of Jeyhan (Turkish spelling,
"Ceyhan"), on our southern coast of the Mediterranean.

We think this option is one of the most feasible plans because
of the following:

1. Turkey Needs
Oil ItselfTurkey needs to buy
oil. We're in need and we'll buy. Statistics show that Turkey
consumes 30 million tons of oil per year. Of that total, we produce
only 15%. By the year 2010, an estimated import volume of 40
million tons will be required. If a pipeline were built connecting
Azerbaijan to Turkey, a great percentage of that oil could be
marketed directly to us. This would be beneficial to both countries.
As next-door neighbors, this obviously means a cheaper supply
for us. But it's advantageous to Azerbaijan, too, as we can pay
in hard currency. Were Azerbaijan to sell their oil internally,
they could not demand the international market prices.

Such an arrangement would enable us to diversify our oil sources
and not be so dependent on a few countries. Additionally, as
one of the eleven partners of the Consortium in which we have
a 6.75% share, purchasing Azeri oil is an added incentive.

2. Financing the
PipelineWe've already said that
we are willing to finance the project. However, we don't anticipate
that this will be necessary. We believe the Consortium companies
are likely to want to invest money both as owners and operators.
As well, Chevron may want to get involved in order to get Kazakh
oil out. Also, international finance organizations are likely
to seek involvement in the investment and could well become equity
holders. Financing the pipeline through Turkey doesn't seem to
be a problem.

3. Lowest Transmission
FeesProximity to Azerbaijan
enables us to offer the lowest competitive transmission fees.
The CPC (Caspian Pipeline Consortium) of Russia which is proposing
to bring oil from Kazakhstan to a new loading facility near the
Russian Port of Novorossiysk (No-vo-ros-SISK) on the Black Sea
has suggested a transmission fee of $3.25 (1992 $US) per barrel.
However, if Azerbaijan oil were added to the pipeline, the price
is expected to increase. Since Novorossiysk is not an international
market, crude oil tankers are likely to have to add a $1-1.50
per barrel tanker transportation fee before they reach Genoa
or Rotterdam, the two main centers of the international oil market.

The Bosphorus route is further complicated because of formidable
risks to the environment. Much of the "early oil,"
is likely to pass through the Black Sea, But the Bosphorus can
not handle additional crude oil transportation. Routing the 40-50
million tons from the major oil production through the Bosphorus
would be impossible.

Because of recent tanker collisions, and in accordance with the
International Maritime Organization (IMO), Turkey has put into
action a new regulation to control the safe passage under heavy
trafficking through the Straits. However, the larger tankers
capable of carrying 300 thousand DWT could be loaded at Jeyhan,
as compared to the smaller tankers of 100-120 DWT that are permissible
through the Straits.

Alternatively, were a southern route from Azerbaijan through
Iran to the Persian Gulf be considered, the costs per barrel
are still substantial. A feasibility study for Iran has indicated
that a transmission fee of $3.67 per barrel would be necessary
to cover expenses for oil transported from Kazakhstan.

Turkish Petroleum has studied the issue in detail and estimates
that Turkey could offer a transmission fee reasonably below $3.25
(1994 $). This is not an official figure yet since such a decision
must be announced by the Turkish government. But it has been
established that Turkey can offer a transmission fee below $3.25
without losing money.

4. SafetyTurkey guarantees the
operational safety within her own territory. Unfortunately, these
days, no one is immune from terrorism. England has the IRA, the
U.S. has just witnessed terrorism in Oklahoma which is far from
any border. It's a useless discussion to build a case against
Turkey because of the possibility of terrorism.

Turkey has promised to guarantee operational safety which means
should anything happen-if the pipeline were to be damaged or
the flow of oil interrupted, then Turkey would pay to restore
the route. In fact, almost all of Turkey's domestic production
is being realized in the Southeastern Anatolia and being safely
transported.

5. Connecting to
Existing InfrastructureThere is widespread
misunderstanding that our proposed Caspian-Mediterranean pipeline
would be utilizing the existing Iraq-Turkish pipeline through
Midyat. Ever since the UN sanctions have been in place against
Iraq, Turkey has been losing $250,000 annually. Despite this,
we are doing what the UN and the international community expects
of us. Our proposed pipeline would carry Kazakh (20 mta) (million
tons per annum) and Azeri (25 mta) from our northern border and
would connect to a pipeline that would need to be constructed
and end in Jeyhan, not to any existing line.

6. Willing to Cooperate
with All CountriesTurkey is not placing
any stipulations on Azerbaijan as to which country oil must pass
through before arriving to Turkey's territory. We're open to
all possible alternatives-Georgia, Iran, or Armenia. (At present,
the Iranian option is hindered by U.S. government policy against
Iran).
We're also open to Armenia. A strip of Armenia, approximately
48 kilometers long, separates mainland Azerbaijan from the non-contiguous
Autonomous Republic of Nakhchivan which borders Turkey. Many
people have been surprised that we have not made exception to
Armenia. But past differences should not hinder attempts to build
the future.

If Azerbaijan opts for the pipeline to run through Armenia, which
could be the most economic route, and could reclaim her invaded
territory via this means, then such a route should be respected
and considered viable. Although we have no preference whether
the route passes through Armenia or Georgia before it reaches
Turkey, we're open to the idea of a "Peace Pipeline".
If such a route would facilitate and expedite peace, then it
is would be beneficial to the entire region-not just Azerbaijan.

Mr. Necdet Pamir, Petroleum Engineer, is Group Manager for Transportation
and Trading at TPAO (Turkish Petroleum Corporation). This division
was recently established in parallel with increasing investment
and activities in CIS countries and the need for transportation
and trading of oil and gas both inside and outside of Turkey.
Mr. Pamir is one of the main authors of the policy position stated
above that has since been adopted by the Turkish government.
He is the TPAO representative for the Oil Expert Subcommittee
of the Consortium which has been formed to develop the Azeri,
Chirag and Guneshli (deep water) fields of Azerbaijan.